Using savings to cover care costs

Rising care home costs are forcing Mavis S, 85, to consider cashing in some of her savings. Now paying £2,560 a month, she is concerned liquidating assets will trigger a capital gains tax charge. MAISHA FROST investigates

Care home costs are estimated to be rising at 5 per cent a year, which is higher than interest rates on cash in savings accounts.

But cashing in savings without a clear plan could mean losing more than you bargained for. As well as paying more tax, savers could also release more cash than they need to in one go, and this might have been better off where it was, earning interest.

“Working out what you need and when is a fine balancing act,” says independent adviser Nick McBreen. “Self-funding residents must establish how much money they will need which is their target income,” he says.

This is done by adding up what they already receive from pensions, benefits and any investments, then deducting this from the fees, building in a 5 per cent increase for each successive year, based on life expectancy. If any deficit shows up, that is the shortfall that must be covered.

Care home costs are estimated to be rising at 5 per cent a year

Understanding the tax implications of their particular savings and investments is also important, as these vary.

Capital gains tax is paid on shares and unit-linked investments. The allowance is £10,100, after which tax is charged at 18 per cent. The bill is calculated on the gain between when you first bought in and when you sell.

Bonds are taxed at source, but any gains when they are cashed in are counted as income and taxed accordingly. Interest on cash bank accounts also comes under income and, unless the saver is non-tax payer, is charged at 20 per cent.

“The important thing here is to avoid going into a higher tax bracket,” says McBreen.

“That’s why knowing your target income and any shortfall are so crucial. With these you can plan ahead and potentially save money by gradually stripping out gains, spread over different tax years.”

McBreen also recommends savers use any review to assess how their investments have performed generally and whether better returns might be achieved by reinvesting them elsewhere.

Although it will all depend on individual circumstances, he advises: “Those holding with profits or life assurance company bonds probably could do better, but must check for any withdrawal penalties. Also be on guard if your money is held in mirror funds which have a double-layer charging structure.”

01872 222422, or email:

nmcbreen@wwfp.net

In April, care homes will announce charges for the coming year and FirstStop, the advice service for older people, is warning residents could face increases of more than 5 per cent.FirstStop’s Philip Spiers explains: “There is a considerable difference between what the council might pay for a care home place and what a self-funding resident might pay.

“The fear is that as councils put pressure on care homes by keeping the amounts they pay low, then there is going to be more pressure on owners to subsidise this by hiking rates for self-funders.”

One alternative is for a resident to buy an annuity paid through a one-off premium. This takes away all worries about running out of cash, but can be expensive if the resident is healthy.